How much of a deposit should I provide the seller when buying a home?
When you are looking for a resale home or condo, you will have to submit not only an offer to purchase agreement, but also a deposit to demonstrate your commitment to the seller you will complete the purchase. It’s a reassurance to the seller that you are acting on good faith and have the means to purchase the home. There are no set limits or guidelines as to the amount of deposit that is required, but in some hot markets, such as Toronto and Vancouver, a larger deposit could mean getting the home or being rejected if there are competing bidders. A larger deposit will also tell the seller you are more committed to get the transaction done and not there to waist the sellers time.
The agreement between you and the seller will determine when the deposit is due, and is something that can be discussed during negotiation process. It most cases, it is due at the time the offer is made. In most cases, the deposit payment is due within 24 hours of the offer being accepted. For smaller markets, a few thousand dollars maybe sufficient. In hotter urban areas, you may need substantially more down payment.
While the deposit is a show of good faith to the seller, the money doesn’t go to them right away. Your Agreement of Purchase and Sale will outline where your deposit will be held, usually until the closing date. In almost all cases, the deposit will be made out to the seller’s brokerage in trust and held in the brokerage’s real estate trust account until it becomes payable according to the agreement. The brokerage must disclose under what conditions and in what amount, if any, interest will be paid on the deposit. When the deposit is held in a registered brokerage’s trust account, the funds are insured under RECO’s (Real Estate Council of Ontario http://www.reco.on.ca) Deposit Insurance Program against fraud, insolvency or misappropriation by the brokerage. That protection is only available if you work with a registered real estate professional.
RECO requires the brokerage holding the deposit to obtain written direction from the buyer and seller with instructions on how the deposit money is to be disbursed. If all goes well, the real estate lawyers for the buyer and seller will come to an agreement as to how and when the funds will be released.
If conditions of the sale are not able to be met and both the buyer and the seller agree to cancel the purchase agreement, the deposit will be returned. Occasionally, a transaction may fail to close for a number reasons such as home inspection, financing not being approved, discrepancies in appraisal values, etc. No matter who is at fault, a written direction from both the buyer and seller will be needed for the brokerage to release the deposit funds. If both parties cannot come to an agreement, it becomes a legal matter for the courts to decide.
I was recently involved in a transaction where the buyer who had put down $20,000 on a $600,000 home with a closing in 3 months with all conditions being waived. Two weeks before the closing, they were having challenges financing. There bank had approved 80% loan to value. They had a total of 10% in down payment but were still short 10% or $60,000. Luckily they were able to get a 2nd mortgage at the last-minute to cover the shortfall. If they were not able to secure that 2nd mortgage, they would have lost their initial $20,000 deposit!
Buying a home is an exciting time, but remember, each decision along the way is important and should not be taken lightly. That’s why you should make well-informed decisions and seek the advice of a trusted Real Estate Professional as well as a trusted Mortgage Professional before entering a real estate transaction.
Salim Moorani is a Licensed Mortgage professional with Zolo.ca and RedDogFinancial.ca
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Sorry experts, the housing market sky isn’t falling | Getting a mortgage can be hard, we make it easy® | Mortgage Broker Lic # M14000543 / Brokerage Lic #12343 | 647-773-9001 | info@RedDogFinancial.ca | www.RedDogFinancial.ca | Nov 24, 2015